by Raul Hernandez
The once positive economic outlook for 2016 took a hit as American consumers opted to save more and spend cautiously in February.
Personal incomes rose 0.2% during the month, according to Monday’s release by the U.S. Commerce Department, but those modest gains were mostly used to bolster savings accounts. The personal savings rate, or the share of income saved, rose from 5.3% to 5.4%. Only once since December of 2012 has the savings rate been that high.
Personal spending, which measures consumption on everything from clothing to auto repairs, rose only 0.1% in February. Perhaps more importantly, personal spending growth was downwardly revised in January from 0.5% to 0.1%.
Consumer spending on durable goods, products designed to last at least three years, rose 0.1%, but the sale of nondurable goods, items like food and fuel, fell by a whopping 1.1%. Weak retail sales, which fell by 0.1% in February, are partly to blame along with low oil prices.
Some economists are also citing unstable financial markets as a reason for February’s sluggish spending growth.
“The distress that we had in the financial markets in the beginning of the year really drives people to be more cautious both on the business end and on the personal side,” said Ward McCarthy, chief financial economist at Jefferies & Company, Inc.
But Scott Brown, chief economist at Raymond James Financial Inc. said that Americans’ reduced spending could also be caused by factors not necessarily within their control.
“It could be that rents are rising much faster than overall inflation. We’re seeing higher healthcare expenditures, higher out of pocket payments and so on. That could be whittling away at some of the gains from those low gasoline prices.”
The economic burden of rising rents, along with student loan payments have taken a toll on younger consumers’ and contributed to their reluctance to spend any disposable earnings.
Daniel Clark, 24, had been living with two friends in an Albany, New York apartment when he landed a good job working in the office of the New York state comptroller. But just as things were looking up, Clark’s roommates decided to move out, leaving him with a tough decision: find a new apartment or move back in with his parents.
“The job was a pay raise for me so I just decided to go home and bite the bullet. I can get this huge amount of debt out of the way and now is as good a time as ever to do that.”
His main expenses now consist of a monthly car payment and food, though even his meals are sometimes taken care of by his parents. But with his loan almost entirely paid off, Clark says he would make the same decision all over again if given the chance.
“It’s going to be eight or nine years without a minimum payment of $300 per month. I’m probably saving an extra $10,000 of interest in the long run.”
January’s downwardly revised personal spending number is of particular concern to economists as the original 0.5% figure was thought to be a sign that Americans were beginning to gain confidence in the economy.
Having that number reduced to 0.1% paints a different picture, one in which Americans are much more concerned with an unstable global economy’s affect on our domestic one, likely reducing investment.
“That big downward revision really paints a different picture when you look at the quarter as a whole now,” said Brown. “That along with a weak durable goods report from Thursday really points to weakness in investment. When you put all that together, it’s really a sharp revision within just a few days.”
Monday’s report did offer some positive news regarding the inflation rate, though it remains below the Federal Reserve’s two percent ideal annual rate for the 46th straight month.
The price index for core personal consumption expenditures, the Fed’s favored inflation measure, held steady at 1.7 percent. Core PCE, which excludes food and energy costs, has not been this high for consecutive months since February of 2013.
With the Federal Reserve committed to its gradual raising of interest rates, it is unlikely that anything within this report will alter those plans.